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A hasty handover of sovereignty by the war-spent British

Kitty Miv, Editor
25 November, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Something of an Asia-Pac flavor in this week's edition, but also something of a mixed report card for a region that is often praised, and rightly so, as the most economically dynamic in the world as of now. Let's start with India. It had a difficult start to life as a country in its own right thanks to the rather hasty handover of sovereignty by the war-spent British, India's former colonial masters, in 1947. Yet one gets the sense that this country of 1bn souls is grossly underfulfilling its economic potential. By now, given the resourcefulness and industriousness of its people, it should surely be giving China a run for its money as the world's leading emerging economy. But it isn't, and it isn't even close. Most official measures put India in about 10th place in the list of economies by size with a GDP of roughly USD1.8 trillion. China's GDP is over four times the size, and, to really put it into context, the USA's GDP is nearly twice the size of China's. India hasn't even overtaken Italy in 9th place yet, which is saying something. There are many economic, social and cultural factors why this is the case, but there is no room here for an exposition on the failings of the Indian economy. So given the editorial confines imposed by this column, I'll cut to the chase and blame the Government. Actually, I've been leading you up the garden path a bit here here, because I intend to award India an encomium. But not for anything that the Government has done. It's because the courts seem to have made a sensible decision in defiance of the tax authorities by supporting Royal Dutch Shell's arguments in a transfer pricing dispute, a ruling which followed hot on the heels of the same court's support for Vodafone in another tax matter (no, not that tax matter — that hasn't been resolved yet). I'm not suggesting here that India's judiciary is usually in the pocket of the Government – again that's an essay for another day. But the Government certainly cannot be described as sensible, at least not most of the time, when it comes to taxation. Prime Minister Narendra Modi promised to be sensible before being swept to power in a landslide victory for the BJP in May, by rebuilding the bridges with foreign investors burned by the previous administration's dash for tax revenue, including the reputationally disastrous 2012 retrospective tax amendment. But then he must have looked at the Government's books and decided that now's not the time to be giving up the chase. Yes, only 3 percent of Indians actually pay tax so the money has to come from somewhere. But there must be a better way to approach the deficit than frustrating investors to the point that they decide to ignore you, which is the danger for India. It's worth noting that these court rulings can be appealed. Choose your next move very carefully, Mr Modi...

India's economy has yet to peak, but most observers would agree that in the main, the country will be looking up at the summit, rather than down at the base, in the coming decades. One really does wonder whether the opposite is true of Japan, which perhaps reached its economic peak over 20 years ago and is now staring up at a debt mountain, wondering when the summit will appear. After some pretty disastrous economic data this year, Prime Minister Shinzo Abe, perhaps the most dynamic Japanese leader in recent history for his economic polices at least, got the frights and decided to cancel a consumption tax rise from five percent to eight percent, not due to take effect until next October; the first stage of the phased increase, from three percent to five percent, which took place last April, was widely blamed for tipping the country into recession. I can absolutely understand why Abe has done this. Politicians trade in the currency of popularity, so canceling what is a highly unpopular policy is a logical move. And by calling a snap election, he can resume his political career without worrying whether sliding popularity will cast him into the political wilderness prematurely. But what is good for Abe personally might not be good for the nation of Japan. Nobody likes to see taxes rise, least of all myself. But the scale of Japan's fiscal problems really is frightening. True, a good chunk of the Government's mountainous debt, worth about 230 percent of the economy and rising, is owned by the Japanese public. But unless some radical solutions are found, the problems will only compound as fewer working people attempt to support an ageing and non-working population that is increasing. Certainly, hiking consumption tax by a few percent isn't radical. But it has to be better than taking more tax from incomes, and it's a start. Abe's decision smacks of kicking the can down the road, which might be expedient in the short-term. But who knows how much tarmac is left? And this consumption tax phobia seems to be a peculiarly Japanese phenomenon. It's like a force that brings death to anyone who dares to mention it. Few other Governments are so meek when it comes to raising taxes, and the Japanese should try living in Europe, where consumers pay rates of VAT of 20 percent or more. Anyway, I have some quite controversial suggestions for Japan's age-induced fiscal crisis, which I'm just going to throw out there. The Japanese tend to live quite long and healthy lives, so a radical solution might be to abolish retirement altogether. Perhaps this could be combined with the elimination of so-called "sin taxes" on alcohol, tobacco, sugar and fatty foods to let the people work and/or drink themselves into an early grave, thus diffusing the demographic timebomb in one fell swoop. I am of course joking. Wouldn't want to give Governments any ideas...

Neither Modi and Abe has enjoyed the easiest of starts in office. And the same can be said of Tony Abbott, Australia's Prime Minister, who really has experienced a baptism of fire after fighting almost to the death to get his cherished policies, namely repealing the carbon and mining taxes, through a Labor/Green Party roadblock in the Senate, with the help of a rag bag of bizarrely-named splinter parties. The parliamentary deadlock almost triggered the "double dissolution," which would have meant fresh elections, potentially snuffing out Abbott's administration almost before it had properly begun. He has also put tax up, but he can't really be blamed for that. Labor says that if Abbott hadn't repealed the two aforementioned taxes, he wouldn't need to raise taxes at all. The reality is though, that the Liberal/National coalition inherited a fiscal train wreck from Labor, and the decision was largely forced upon him. I can see that Abbott, as a conservative, is a tax cutter at heart, but beyond commissioning yet more examinations of Australian taxation (surely one of the most reviewed tax systems in history) and cutting red tape for small businesses, his fiscal hands are largely tied. He is, however, committing to tax cuts of sorts by ramping up Australia's free trade agenda. It was encouraging to note that a discussion of trade with Francois Hollande recently didn't put him off seeking an immediate launch of FTA talks with the EU. And having inked free trade deals with major Asia-Pac economies (China, Japan and South Korea) Australia's next trade priority is India. None of these countries can be said to be the easiest of negotiating partners, so perhaps some of the luck of the Lucky Country has transferred itself to Abbott's Government. But, as many people say, one tends to make one's own luck, and the Prime Minister certainly loves a challenge!

Kitty's Encomiums and Execrations

Methodology: each week (this is the 132nd) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2. In the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:
Australia perseverance
India judicial

And Kitty's Execrations:
Japan meek




About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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